What Playboy Can Learn From Nintendo (PLA, NTDOY, AAPL, MCD)

by Jeff Reeves | May 7, 2010 9:23 am

What Playboy Can Learn From Nintendo (PLA, NTDOY, AAPL, MCD)

Playboy Enterprises Inc. (NYSE: PLA[1]) has already cut its staff and cut its office space … but you know things are bad when Hef starts cutting back on the amount of skin his Bunnies are baring. According to industry reports, Playboy is planning on a mix of new sites aimed at tackling a tamer market – and none of them involve nudity. According to Playboy insiders, the company is developing a “free, safe-for-work site” its calling TheSmokingJacket.com, as well as additional subscription content with a slightly tamer feel.

There’s no doubt that Playboy needs to find a new model. Hugh Hefner’s company hasn’t been profitable in well over a year due to restructuring charges. And while Thursday’s earnings report showed significant narrowing of the shortfall and an earnings report that topped Wall Street expectations, the company is certainly not out of the woods. Sure, shares are up 25% so far in 2010 — but PLA stock is actually down slightly compared with a short-lived spike in fall 2009 and off more than 50% from May of 2008.

Of course, Playboy’s plight isn’t exactly unique. Media stocks from Rubert Murdoch’s News Corp. to Time Warner are losing ground. But everyone has to admit it’s a big shift for the struggling media company in an effort to broaden its base to readers and advertisers leery of Playboy’s racy reputation … but will such a move actually result in a healthier bottom line or is it a desperate move to avoid disaster?

To some, Playboy without the nudity sounds to some have just about the same appeal as non-alcoholic beer or tofu turkey on Thanksgiving. Or more plainly, the product will probably appeal to a small group despite the vast majority of consumers’ preference to the real thing. But believe it or not there’s actually precedent for businesses that reinvent themselves in an effort to broaden their appeal and evolve with the times.

My favorite example is Nintendo (NTDOY[2]). Some folks don’t know it was actually founded in the 19th century as a playing card company — and stayed that way for the better part of seven decades. But in 1956, the company’s founder travelled from Japan to the U.S. in a visit to the dominant playing card manufacturer of that time … and was disappointed to learn he would be visiting a rather small office, and not an impressive business complex. He realized then that the company needed to figure out a new plan to survive.

Things got rocky for a decade or so. Nintendo set up a taxi company, a TV network and even a food company peddling rice. All failed, and NTDOY was on the brink of disappearing. Then in 1966 Nintendo moved into the toy industry – a natural extension for a playing card company. It’s products included light gun games that eventually led to its trademark Zapper a generation of kids used to play Duck Hunt and Hogan’s Alley on their home televisions. The rest is history.

And the most interesting part of the story is that Nintendo has never stopped reinventing itself. The Wii was a groundbreaking console that introduced motion-sensitive controls instead of a typical button and joystick game. Looking forward, Nintendo has a 3D hand-held video game console[3] in development that could change the video game industry landscape all over again. And believe it or not, Nintendo video games may even be coming to a school near you in the near future.

It’s innovations like this that make Nintendo a great stock for investors even at this very moment. The company has surged 27% year-to-date in 2010 and shows no sign of slowing down. As it continues to grow and evolve to reach beyond a core audience of hardcore gamers, NTDOY will only grow its market share more – and deliver bigger profits to shareholders.

That’s the lesson for Playboy: That true growth always relies on moving beyond a niche product, whether its playing cards or nudy mags. In fact, this is how fortunes are made on Wall Street. Think of Apple (AAPL) and its move away from computers and into innovative personal electronics with its groundbreaking iPod. Think of McDonald’s and its move away from burgers and into the highly profitable coffee business with its McCafe line. This has really boosted McDonald’s sales and earnings[4].

Though Playboy has always offered plenty of skin to its readers, a time of significant restructuring is the perfect time to try something new for the brand. Because the one thing that’s become painfully clear over the past 18 months is that sticking to the old way of doing things at Playboy could mean that the publication’s days are numbered.

As of this writing, Jeff Reeves did not own positions in any of the companies named here.

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